Options strategies get benchmark boost

The Chicago Board Options Exchange’s BuyWrite Index may prove valuable to asset managers looking for an options strategy benchmark. Dwight Cass reports

The ‘cult of benchmarking’ that gripped investors and investment consultants in the 1980s and 1990s, dueto the rise of index-based investment strategies, has been the bane of assetmanagers specialising in options-based strategies. Without a benchmark, theseinvestment strategies have been a hard sell. But that has started to change,thanks partly to the Chicago Board Options
Exchange (CBOE), which launched an options benchmark index in mid-2002.

The CBOE’s BuyWrite Index, or BXM, has gained enough traction that indexingheavyweight Standard & Poor’s is now discussing a potential partnershipwith the exchange to market the product.

“When we go to the market-place with our option strategy products, what we’veheard from the plan sponsor and consulting community is that if there is somekind of formal benchmark, it makes it much easier for them to buy into the strategy,” saysRon Egalka, president and chief executive of Rampart Investment Management, aBoston-based investment advisory firm. “Without that it is one uphill battleafter another. Most consultants don’t want to even contemplate a strategythat doesn’t have something that closely benchmarks the strategy you’reembracing.”

Rampart found what it was after in the BXM. The index, developed by Duke Universityprofessor Robert Whaley, essentially replicates the strategy of buying the S&P500 and simultaneously writing a call option on it.

Specifically, it is based on selling the near-term, near-the-money S&P 500index (SPX) call option against the S&P 500 stock index portfolio each month.The call that is written has about one month remaining to expiry. Edward Provost,executive vice-president of business development at the CBOE in Chicago, saysthe exchange sought to incorporate the transaction costs involved in such a strategyby writing the call at the bid, rather than the mid-market.

Rampart licensed the BMX index in April, and has begun assembling investmentproducts for both institutional and retail clients. Egalka says the firm putits first institutional client into a BMX-based product on June 1, a US corporatepension plan that he declines to name. Rampart plans to roll out investment productsfor both taxable and non-taxable (for example, 401k plan) retail investors basedon the index within a few months.

Buy-write strategies obviously under-perform simple buy-and-hold strategies duringmarket rallies such as the 1990s’ stock market boom. But Rampart says theBMX has outperformed the S&P 500 in the past one, three and five years – lastyear beating the return on the cash index by 14.45 percentage points. Going back15 years, the BMX index has had an annualised return about 1 percentage pointhigher than the S&P 500 index, with about 67% of the risk, Rampart says.

Scaling HyTS

• Nasdaq pulled out of its single-stock futures joint venture with Euronext.liffe in late June. Nasdaq said that as part of a strategic review of its business it has agreed to forgo its stake in the joint venture known as NQLX. It will transfer ownership to Euronext.liffe, which will assume financial and management responsibility for the business. Euronext.Liffe said NQLX’s management and operations would continue unchanged. • The International Securities Exchange (ISE) stepped up its attempts to go head-to-head with the Chicago Board Options Exchange (CBOE) in trading equity index options by unveiling its first product, the Standard & Poor’s SmallCap 600 index. The ISE said it will introduce index options trading pending Securities and Exchange Commission (SEC) approval. The ISE is currently petitioning the SEC to lift its block on other exchanges being granted a licence to make markets in equity index products. In November 2002, it formally urged the SEC to “remove the last bastion of anti-competitive listing practices in the options market”. • Deutsche Börse added three more bond exchange-traded funds (ETFs) as part of its XTF segment. Issued by German ETF provider Indexchange, the three ETFs are based on indexes from the eb.rexx Government Germany index family with different bond maturity classes (1.5 years to 2.5 years, 2.5 years to 5.5 years and 5.5 years to 10.5 years). The eb.rexx Government Germany indexes are calculated by Deutsche Börse from prices traded in German government bonds on Eurex’s bonds platform. • Euronext.liffe launched futures and options contracts based on the FTSEurofirst 80 and FTSEurofirst 100 indexes in June. Meanwhile, the exchange said Lyxor Asset Management plans to launch an exchange-traded fund on the FTSEurofirst 80 index in September, to be traded on Euronext. The FTSEurofirst series is a new generation of tradable European indexes designed by FTSE Group and Euronext. The FTSEurofirst 80 represents the performance of the eurozone and the FTSEurofirst 100 represents the performance of the eurozone and the UK.